The laws of gravity dictate that what goes up must come down.
But when it comes to the real estate market, the same rules don’t have to apply.
And so in recent months, as the rate of house price increases has slowed and the economy is under pressure, questions have begun to arise as to whether a drop in prices might be on the cards.
This hypothesis was reinforced by research contained in ESRI’s latest quarterly economic commentary, which suggested that the housing market here could be overvalued by up to 7%.
The institute didn’t go so far as to suggest prices could come down – it said it was too early to tell. But he said the rate of price increases should “moderate considerably”.
What have house prices done recently?
The Central Bureau of Statistics released the latest residential property price index on Thursday.
It showed national prices for the year to the end of August rose 12.2% – the fifth month in a row in which the annual rate of house price growth slowed nationwide. .
Since August last year, the growth rate had climbed into double digits, and it peaked at the beginning of the year, before the change in the international economic climate.
In February and March, it stood at 15.1%, but in April it fell back to 14.5%, then to 14.4% in May, then to 14% in June, before falling back to 13.3% in July and 12.2% in August.
The trend has largely been mirrored both inside Dublin and outside the capital in the rest of the country, although the rate of increase remains stronger outside Dublin.
Houses and apartments also followed a similar pattern.
So what is causing the slowdown in price growth?
There are a large number of factors that influence house prices.
However, like any market, it basically comes down to supply and demand.
On the supply side, after years of extreme tension, there are signs that the availability of homes to buy may be starting to loosen up a bit.
Transaction volume data suggests a significant uptick in August due to the strength of the new home market, which saw a 42% increase in sales over a three-month period.
And that helps ease the pressure on the growth rate.
“We expect to see a further slowdown in price growth in the months ahead as the volume of homes for sale finally begins to pick up,” said Trevor Grant, chairman of the Association of Irish Mortgage Advisors.
“It was recently reported that there were 15,300 used properties for sale across the country in July, representing an annual increase of 1,800 properties,” Grant said.
“The volume of homes changing hands since the start of the year has also increased; if the increased activity reported in the residential construction sector in recent months continues, as expected, this could really benefit owners. potential,” he added.
Demand is also deflating, as rising interest rates and inflation push home ownership beyond the reach of some whose incomes are bordering on mortgage eligibility.
The European Central Bank has already raised rates by 1.25% and there are expected to be two more increases when the bank’s Board of Governors meet on October 27 and December 15.
“These impact affordability and have people worried because no one knows how far they might go,” said Pat Davitt, chief executive of the Institute of Professional Auctioneers and Valuers.
“One has to question the justification for such interest rate hikes, given the pressures consumers are facing across Europe,” he added.
Central Bank mortgage rules also continue to help contain house price inflation.
They are currently under review, with a decision expected before the end of the year on whether to make changes.
Although the market recognizes that they generally have the desired effect of preventing another credit-fueled bubble, significant changes seem unlikely.
But are there ongoing pressures that are still keeping house prices high?
Yes there is.
We continue to have a severe housing shortage and despite signs that progress can be made, there is a long way to go before we have the right amount of housing for our population.
The other factor pushing prices up is inflation.
Construction price inflation was 14% year on year in July, according to the Society of Chartered Surveyors.
Soaring costs of raw materials, labor and other factors continue to make construction more expensive.
While some developers absorb some of these increases, others pass them on to the prices they charge for new homes, extensions and renovations.
Other builders, however, simply choose not to undertake certain work at all because they cannot charge for it.
If this continues, the increase in new housing supply that we saw earlier could fade, putting upward pressure on prices.
A third factor at play is that while interest rates are rising, most major lenders here have yet to pass those increases on to borrowers, giving homebuyers some breathing room.
However, AIB announced on Friday that it would increase the interest rate it charges for new fixed-rate mortgages by 0.5%. The change does not affect customers who are already on a fixed rate or those who are on a variable rate.
Central Bank data released during the week showed that average interest rates here remained flat in August, while at the same time in the Eurozone they rose more sharply.
It is expected, however, that banks will not be able to bear the pass-through of additional borrowing costs indefinitely.
“The Irish property market is proving more resilient than international experience as Ireland faces a severe supply shortage and declining mortgage rates on an annual basis due to consolidation in the banking sector, which which means increased competition with non-bank lenders,” said economist Shaun. McDonnell at Goodbody stockbrokers.
What is then the probability that real estate prices will fall?
Home prices here have recovered significantly from the depths of the post-Celtic Tiger crash.
Nationally, they now stand 2.2% above their highest level recorded in April 2007, just before the catastrophic bursting of the credit-fueled bubble.
From January 2008, they fell for five consecutive years until June 2013, when the recovery took hold.
And since then there has only been one four-month period starting in July 2020, at the height of the Covid-19 pandemic, where they fell slightly, before recovering sharply over the 24 months. following.
This recovery was largely fueled by large household savings accumulated during the pandemic shutdowns, as well as disrupted supply and pent-up demand.
With demand remaining strong and supply yet to catch up, experts say prices are unlikely to fall anytime soon.
“We’ve really only had one period in living memory, during the 2008 financial crisis, where we saw real reductions in property values,” Trevor Grant said.
“It was driven by a prolonged period of easy credit, followed by an extremely severe recession, when unemployment soared,” he said.
“We haven’t had credit like this since and no one seems to be predicting a spike in unemployment, so it’s hard to see what could drive house prices down in the months ahead,” he said. -he declares.
Shaun McDonnell of brokerage firm Goodbody also predicts that while annual house price growth will continue to slow in the coming months, a price decline seems unlikely.
“The severe shortage of supply, tighter credit standards, excess savings of 25 billion euros and the absence of significant renewal of demand to date suggest that it is highly unlikely that oil prices will real estate in Ireland is falling,” he said.
“We support the idea that Ireland will continue to experience price growth throughout 2023, albeit at a lower rate than currently recorded,” he said.
Others agree.
“At first glance, the data indicates few signs of a slowdown,” wrote Conall MacCoille, chief economist at Davy and author of MyHome.ie’s regular market reports.
“However, the deals settled in August were agreed months ago. In contrast, our recent MyHome report showed asking prices fell 1% in Q3 2022, with annual inflation slowing to 7.8% “, did he declare.
“That said, our forecast for RPPI inflation to slow to 6% by December now looks a little too pessimistic,” he added.
And so it looks like house prices are set to continue to rise.
Bad news for those looking to move up the property ladder or trade – good news for those who have one or more properties in their name.